Colombian Peso’s Decline Is ‘Healthy’ Shock Absorber, Uribe Says

Colombia’s central bank Governor Jose Dario Uribe said the recent fall in the peso is “healthy” and won’t boost inflation in South America’s fourth largest economy.

The effect of a weaker currency on consumer prices is “very, very low,” and will be more than offset by lower commodities prices, Uribe said in an interview in Washington DC, where he’s attending the semi-annual meetings of the International Monetary Fund.

“The behavior of the peso recently shows the advantages of having a flexible exchange rate,” Uribe said. 

“It has had a movement that’s healthy, that shows how the exchange rate can serve as a shock absorber.”

The peso has fallen 7 percent against the U.S. dollar since the end of July, as investors dumped emerging market assets on signs the world recovery was faltering. 

Even after the decline the peso is one of only two Latin American currencies that have risen against the dollar this year, alongside Peru’s sol. 

The Brazilian real and the Mexican and Chilean pesos have all weakened more than 9 percent since the start of January.

The peso weakened 4 percent to 1903.94 per dollar this week.

Uribe said domestic demand remains “dynamic,” and the economy is “not very far” from the non-accelerating inflation rate of unemployment, or NAIRU, a term used by economists to mean the lowest level joblessness can reach before inflation starts to accelerate. 

The labor market is particularly tight for skilled workers, he added.

Policy makers surprised analysts by keeping its benchmark interest rate unchanged for the first time in seven months in August, after world stock markets slumped. 

The central bank kept the benchmark rate at 4.5 percent while it waits for more information about the likely effect of global financial turbulence on Colombia, Uribe said.

Uribe raised the borrowing costs from from 3 percent in January as the economy grew 5.2 percent in the second quarter from a year earlier, led by mining and oil. 

Chile, Mexico and Perú also held rates last month, while Brazil’s central bank surprised investors with a half point rate cut.

Annual inflation slowed to 3.27 percent in August, from 3.42 percent the previous month, as prices unexpectedly fell 0.03 percent from a month earlier. 

The central bank targets inflation of 2 percent to 4 percent.